Friday, January 08, 2010

Creative Destruction and the Law of No Consequences

By Richard Vedder

The other day I happened across the FORTUNE 500 rankings of American corporations for 1955. I was struck at how quaint the list was, just looking at the top 100. Companies that are defunct or are minor today, like "Armour" and "Bethlehem Steel" ranked highly, while other American corporate powerhouses of today, such as Microsoft, Intel or Wal-Mart, were non-existent.

Amongst American businesses, the process of Schumpeterian "creative destruction" leads to constant movement of the companies that are most successful. The life expectancy of the typical American corporation is far from infinite, and, what is more interesting, is that it is unpredictable. Who would have guessed, say, even 10 years ago, that in the following decade General Motors, Chrysler, Enron and World Com, all corporate giants around 2000, would go bankrupt, some to completely disappear? Who would have guessed even in 2005 that Google would have a greater market capitalization in 2010 than General Electric?

Contrast this to higher education. Since there is no discernible "bottom line" to higher education, people create them --in the form of college rankings. The US NEWS & WORLD REPORT rankings are the oldest of the rankings, and it is interesting to compare top 100 schools over time on those rankings. Or even on rankings pre-dating US News'. I once looked at a ranking of top 10 schools done by someone in 1940 ---and the top schools then were very similar to the top schools today, with Harvard, Yale and Princeton being the top three then and now. We at CCAP are currently researching the seeming stability in higher education rankings with the instability in corporate rankings.

What we can say now is that college "rankings" are largely reputational and input-based, meaning the path to success is to be considered good by other university people and to spend a lot of money on things like faculty salaries. New approaches to rankings, such as we are doing with Forbes, try to break out of this mold, but the approach defined above still dominates.

The powerful prestigious colleges that dominate trade associations and lobbying organizations like the American Council of Education and other groups work hard to prevent the public from gaining too much information about colleges, because the introduction of objective, statistics-based criteria might prove embarrassing --for example, Duke and Yale seniors do poorly on the Intercollegiate Studies Institute Survey of Civic Literacy than do freshmen, so schools such as these are not keen on expanding the body of knowledge about the "value added" by colleges. For the umpteenth time, including the third this week, I echo Kevin Carey's plea to make governmental funding of universities contingent on the provision of truly illuminating information on what students learn during their academic careers, along with other information (e.g., detailed budget information).